1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 5901 GREEN VALLEY CIRCLE 3 CULVER CITY, CALIFORNIA 4 5 6 7 8 REPORTER'S TRANSCRIPT 9 NOVEMBER 29, 2016 10 11 CORPORATE FRANCHISE AND PERSONAL INCOME TAX HEARING 12 APPEAL OF 13 AHMAD GHADERI AND SUSAN L. GHADERI 14 NO. 773301 15 16 AGAINST PROPOSED ASSESSMENT OF 17 SALES AND USE TAX 18 19 20 21 22 23 24 25 26 27 Reported by: Jillian Sumner 28 CSR No. 13619 1 1 P R E S E N T 2 For the Board of Equalization: Fiona Ma, CPA 3 Chairwoman 4 Diane L. Harkey Vice Chair 5 Jerome E. Horton 6 Member 7 Sen. George Runner (Ret.) Member 8 Yvette Stowers 9 Appearing for Betty T. Yee, State Controller 10 (per Government Code Section 7.9) 11 Joann Richmond 12 Chief Board Proceedings 13 Division 14 For Board of Equalization Staff: Anthony Epolite 15 Tax Counsel IV Legal Department 16 17 For the Department: Susanne Coakley Tax Counsel III 18 Legal Department 19 Ciro Immordino Tax Counsel 20 Legal Department 21 For Petitioner: Jere McDonald Attorney 22 Ahmad Ghaderi 23 Taxpayer 24 25 ---oOo--- 26 27 28 2 1 5901 GREEN VALLEY CIRCLE 2 CULVER CITY, CALIFORNIA 3 NOVEMBER 29, 2016 4 ---oOo--- 5 MS. RICHMOND: Our next case is B2, 6 Ahmad Ghaderi and Susan L. Ghaderi. Please come 7 forward. 8 MS. MA: Okay. All right. Thank you very 9 much. 10 Mr. Epolite, please introduce the issues in 11 this case. 12 MR. EPOLITE: Good morning, Members. There 13 are three issues before the Board in this appeal: 14 Whether Appellants have shown error in 15 Franchise Tax Board's disallowance of the claimed 16 automobile expense deduction for 2006; 17 Whether appellants have shown that the 18 distributions they received from their wholly owned 19 corporation during 2007 constitute a bona fied loan 20 rather than a constructive dividend; 21 And, three, whether appellants have shown 22 that the Franchise Tax Board erroneously imposed a 23 late filing penalty for 2007. 24 MS. MA: Okay. Thank you. 25 To the appellants, welcome to the Board of 26 Equalization. You have ten minutes to make your 27 initial presentation, and an additional five minutes 28 on rebuttal. 3 1 Please introduce yourself for the record, 2 and then you may begin your presentation. 3 MR. McDONALD: Thank you. 4 Good morning, Board. My name is 5 Jere McDonald, and I'm the representative of the 6 taxpayer. 7 We're here this morning as a final attempt 8 to present our position in regards to the 9 transaction in question, and why we feel strongly 10 that the transaction should be treated as a loan. 11 The audit of the 2006 and '7 individual in 12 tax -- income tax return of the taxpayers Ahmad and 13 Susan Ghaderi began in early 2010, a very long time 14 ago. But we have continued to push forward with 15 this issue until we have no other options, as we 16 strongly believe in the transaction being treated as 17 a loan. 18 We have provided the Board a narrative of 19 the transaction, which outlines a brief history of 20 the transaction and what was occurring at that time 21 that required the refinance of the property and 22 movement of moneys to the other entities. 23 It is very important to note the timing of 24 events as detailed in the narrative. Specifically, 25 the refinance of the Valencia property was only done 26 to generate the cash necessary to complete the 27 purchase of the Sand Canyon property. 28 Sand Canyon had already been identified as 4 1 a development site. Our broker was already in 2 negotiations with the seller, and Centennial Bank 3 had already provided the initial letter of interest 4 prior to this refinancing occurring. 5 We would like to stress again the original 6 intent was to have the moneys moved between the 7 entities and not to the shareholder. But the 8 lending arrangements required that the moneys be 9 reflected as coming from the shareholder to the new 10 entities. 11 As a result, the moneys were loaned to the 12 shareholder, who then loaned the moneys to the new 13 entities. 14 We would also like to indicate that at no 15 time prior to this transaction, or at any time 16 after, has the shareholder taken any dividend 17 distributions from any of the Ashdon entities. 18 Also included in the package provided was 19 documentation regarding the auto expense deductions 20 for year 2006. The taxpayer was finally able to 21 locate the cancelled checks to support the auto 22 expenses, and we are respectfully requesting 23 consideration be given to these expenses. 24 The original audit had disallowed 25 approximately $1.6 million of consulting expenses. 26 We were able to substantiate all of these expenses, 27 resulting in no change to consulting expense 28 deduction. And we feel the attached substantiation 5 1 of the auto expenses should be sufficient to allow 2 deductibility in 2006. 3 Finally, a late filing penalty was assessed 4 for tax year 2006. Though the FTB indicates the 5 return was received after the due date, we stand by 6 our position that the return was prepared by the 7 extended due date of October 15th, 2007. 8 We do not know what occurred with the 9 original mailing of the return, but ask that strong 10 consideration be given to the filing history prior 11 to 2006. 12 We have enclosed in the packet a summary 13 provided by the FTB of filing dates of the taxpayer 14 returns for the previous years. 15 I personally would like to thank the Board 16 for allowing us to present our case this morning, 17 and hope you will consider the information provided 18 in arriving at your decision. 19 Mr. Ghaderi would like to resend some 20 information to you now. 21 Thank you. 22 MS. MA: Thank you. 23 Good morning. 24 MR. GHADERI: Good morning, Madam Chair and 25 Members of the Board. Thank you for your time 26 today. 27 We've been working -- first of all, my name 28 is Ahmad Ghaderi. 6 1 We've been working with the Franchise Tax 2 Board for several years related to the audit of our 3 personal taxes. All the individuals from the FTB 4 that we have interactions with have been gracious 5 and helpful, and I want to thank them for that. 6 I've broken my comments into three 7 sections. Auto expenses, as Mr. McDonald mentioned 8 in his statement, during the past two years we have 9 provided substantial documentation to substantiate 10 our deductions, namely our payments to our 11 consultants and our auto expenses, which FTB 12 originally declined to accept. FTB has already 13 accepted information regarding our outside 14 consultants. 15 Regarding our auto expenses, we have been 16 able to find copies of our auto expense checks for 17 2006. Which also substantiates the auto expenses 18 that we have listed. I think we have -- in fact, we 19 have more auto expenses than we have reported. 20 I submit I have already submitted 14 copies 21 of the auto expense table, including copies of the 22 cash checks. 23 Based on this, I respectfully ask that the 24 Board eliminate the entire 2006 tax assessment and 25 related penalties and interest. 26 Second item, refinancing for Ashdon 27 Development Property. My wife and I started one of 28 our gas station properties in late '90s. In January 7 1 of 2006 we identified Ashdon Sand Canyon property as 2 one of the locations, which we wanted to acquire in 3 order to expand our business. 4 As part of our negotiations with the 5 Sand Canyon property, it required confirmations of 6 funds and loan approval prior to entering escrow. 7 We have con -- we contacted our lender who had the 8 loan on the Valencia site, and worked with them to 9 obtain approval regarding a refinancing of the 10 Valencia site, and use portion of the equity that we 11 had built to buy the Sand Canyon site. 12 Once we were able to obtain bank's 13 approval, we finalize on negotiation, finalize the 14 loan and entered escrow to purchase the Sand Canyon 15 property. 16 As part of the loan process, since Ashdon 17 Valencia and Ashdon Sand Canyon were set up as 18 different entities, and my -- my wife and I had to 19 sign personal guarantees for the loan, we could not 20 simply have the funds moved from Ashdon Development 21 Valencia to Ashdon Sand Canyon. Our lender had to 22 give us the funds, and then we loaned it to 23 Ashdon Sand Canyon in order to buy that property. 24 At no time were the funds used for personal 25 use. Funds were used for expansion of existing 26 operations. We did not use it as a deduction for 27 Ashdon Development. 28 The loan should not be considered a 8 1 constructive dividend, in that based on the loan 2 documents that we supplied to FTB, there was and 3 still is an expectation and anticipated repayment of 4 the loan to Ashdon Development by Ashdon Sand 5 Canyon. 6 Contrary to FTB's contention, we have never 7 collected any payment or dividends from 8 Ashdon Development. Ashdon Sand Canyon has not -- 9 has not been able, to this date, pay any payments to 10 Ashdon Development or my wife or I. 11 Security and collateral was provided for 12 the loan, being the Sand Canyon property itself, as 13 was the personal guarantee that my wife and I signed 14 on for the loan. 15 As shareholders of Ashdon Development, we 16 could not make any payments to Ashdon Valencia. 17 Since Ashdon Sand Canyon was not in a position to 18 pay us, whereby we could not pay Ashdon Valencia. 19 Contrary to FTB's claim, I'm not the only 20 shareholder of the company. My wife is also an 21 officer of the company. And defer -- and the funds 22 were used to expand our business and not for 23 personal use. 24 Contrary to FTB's claim, there was a 25 sealing as to the amount that the corporation 26 advanced. And that was based on the equity of the 27 business and the -- based on bank's appraised 28 value of our asset. 9 1 As FTB has indicated, we did record this 2 transaction on our tax returns. That should be more 3 than sufficient to qualify as recording the 4 transaction. 5 There is and there was set maturity dates 6 in our loan documents, which was at the time of the 7 sale of the Sand Canyon property. 8 Please keep in mind that to this date 9 Sand Canyon property is still not profitable. 10 We respectfully make the same claim as 11 related to Ashdon Development El Toro, that the 12 funds loaned to our El Toro entity was also for the 13 expansion of our business. And all the items 14 mentioned earlier apply to this side as well. 15 Based on this, I respectfully request that 16 the Board consider the funds from Ashdon Development 17 as a loan versus dividend to the shareholders, and 18 abate the 2007 tax assessment and related penalties 19 and interest. 20 Late filing. Um, I have no reason to 21 believe that Mr. McDonald would not file our 2000 22 tax return with FTB in a timely manner. I deal with 23 a lot of government entities because of my 24 engineering company, and there are times when 25 mistakes are made by government agencies. And FTB 26 is no different. 27 As Mr. McDonald indicated, he has clearly 28 shown documentation that we had filed our paperwork 10 1 on time. And I find it hard to believe that if we 2 had not filed our paperwork with FTB, that FTB would 3 wait close to six or seven years to reach out to us 4 and suddenly assess the late penalty. 5 In closing, my wife and I took the risk of 6 refinancing our property and investing into 7 businesses that unfortunately have not been 8 profitable since day one. And our investments took 9 place during the harsh recession period of many 10 businesses, and we were no different. Went 11 through -- starting in late 2007. 12 We have worked hard and put every penny 13 into these two businesses and kept them running. I 14 did not take a shortcut of filing bankruptcy or go 15 through a foreclosure process, which unfortunately 16 many had. 17 I respectfully request that the Board look 18 at our case based on the business intent of this 19 transaction versus the documentation aspect of the 20 transaction, and abate the assessed taxes and 21 related the penalties and interest. 22 Thank you. 23 MS. MA: Okay. Thank you. 24 Franchise Tax Board, please introduce 25 yourself for the record and begin your presentation. 26 Ten minutes. 27 MS. COAKLEY: Thank you. Good morning, 28 Chairwoman Ma and Members of the Board. My name is 11 1 Susanne Coakley, and I'm representing Franchise Tax 2 Board. Also here is Ciro Immordino. 3 There are three issues for your Board to 4 decide in this appeal. The first issue is whether 5 appellants received loans or constructive dividends 6 from Ashdon Development. 7 The second issue is whether appellants have 8 substantiated a claim to business expense deduction 9 in 2006. 10 And the last issue is whether appellants 11 had reasonable cause for filing a delinquent income 12 tax return for 2007. 13 The first issue is whether appellant 14 received loans or constructive dividends from their 15 wholly owned corporation, Ashdon Development. 16 Appellant husband was president and sole 17 shareholder of Ashdon Development, a C corporation 18 in the business of retail gas stations. 19 Ashdon Development transferred funds of 20 approximately $2.3 million to appellant husband as 21 its sole shareholder. 22 Appellants contend that they invested 23 moneys into two newly created business entities 24 several months after they received the funds from 25 Ashdon Development. 26 Appellants appear to argue that this 27 somehow proves that the distributions to appellants 28 are loans. 12 1 For tax purposes, the difference between a 2 loan and a dividend is material. Because dividends 3 are taxable, whereas loans are not taxable. Courts 4 have applied a list of factors in order to determine 5 loan or a dividend. 6 After reviewing the factors applied by 7 Courts, including the Ninth Circuit, respondent 8 determined that the transfers of funds were 9 constructive dividends from Ashdon Development for 10 the following reasons: 11 No. 1, appellants controlled 12 Ashdon Development and authorized all transfers of 13 funds from the corporation to themselves. 14 No. 2, appellants did not provide 15 collateral for the transfers of funds. 16 No. 3, appellant provides two non-interest 17 bearing promissory notes with no terms for 18 repayment. 19 The first promissory note for approximately 20 $1.9 million was created seven months after 21 appellants received the funds from Ashdon 22 Development. 23 No. 4, appellants did not pay interest on 24 the funds they received from Ashdon Development. 25 No. 5, appellants did not, at any point in 26 time, repay any portion of the funds from Ashdon 27 Development. 28 And No. 6, Ashdon Development did not 13 1 provide terms for repayment, and did not force 2 repayment of the funds it transferred to appellants. 3 Lastly, the fact that appellants invested 4 moneys into two newly created business entities 5 several months after receipt of the funds from 6 Ashdon Development, is a separate transaction with a 7 separate tax effect. 8 Courts would not consider the separate 9 transaction in determining whether the distributions 10 from Ashdon Development to appellants were a loan. 11 To suggest otherwise is an incorrect application of 12 the law. 13 In addition to the factors already 14 discussed, the standard Courts often use is whether 15 this would occur between two unrelated taxpayers. 16 For example -- two unrelated parties. 17 Excuse me. 18 For example, would a reputable financial 19 institution loan $2.3 million to appellants with no 20 interest, no collateral, no terms for repayment, no 21 repayment on the loan at all, and no promissory note 22 at the time of the transfer for the majority of the 23 funds? 24 The logical and reasonable response is no. 25 Based on the law, the distributions from 26 Ashdon Development to appellants are not loans, but 27 taxable distributions known as constructive 28 dividends. 14 1 The next issue is the business expense 2 deduction. Appellants claimed an expense deduction 3 of approximately $1.3 million on their federal 4 personal income tax return. Related to appellant 5 husband's wholly owned corporate -- S corporation, 6 A&S Engineering. 7 At appeal respondent allowed over 90 8 percent of appellant's claim deductions with the 9 exception of the automobile expense deduction. 10 The amount at issue can be broken down into 11 two subparts: Claimed expenses related to lease 12 payments for cars and mileage reimbursement. 13 Respond -- respondent requested 14 substantiation for these items at audit protest and 15 appeal. 16 Respondent was more than willing to look at 17 any new documentation to try to allow the expense 18 deduction. 19 Until this morning, appellants have 20 provided nothing to support the lease payment 21 expenses and have provided only a handwritten 22 schedule for mileage reimbursement with no 23 corresponding checks to support it. 24 Instead, appellants submitted three 25 unrelated checks to support mileage reimbursement. 26 There are problems with these checks. 27 No. 1, the checks appellant submitted are 28 not on appellants own schedule. 15 1 No. 2, the checks on their face do not 2 appear to be for automobile expenses H and S 3 Engineering. 4 And No. 3, the checks submitted total a 5 little over $1,000, or just a fraction of the 6 expenses claimed. 7 In addition, this morning, appellants have 8 provided another schedule with checks. I would be 9 happy to review this in more detail if your Board so 10 desires. After a brief review, I can tell you that 11 there appeared to be at least a few inconsistencies. 12 The first one is that the original amount 13 of the auto expense at issue is different than what 14 they claimed on their income tax return. 15 Second, there appeared to be at least four 16 checks that are for the wrong year for the 2005 tax 17 year instead of 2006. 18 It is well said in law, that the taxpayer 19 has the burden of proving an entitlement to the 20 deductions claimed, and that unsupported assertions 21 are not sufficient to satisfy a taxpayer's burden of 22 proof. 23 Because appellants have claimed an 24 automobile expense, they must meet the basic 25 requirements of an ordinary and necessary business 26 expense, as well as the more stringent 27 substantiation requirements of section 274 of 28 internal revenue code. 16 1 Appellants have not met their burden due to 2 the fact that they have -- throughout this process 3 they have provided nothing for the lease payment 4 expenses and only a handwritten schedule, the 5 mileage reimbursement expenses. Therefore at this 6 point, respondent maintains its position that it 7 correctly allowed over 90 percent of appellants 8 claimed expense deduction related to their S 9 corporation, A&S Engineering, and disallowed only 10 the portion that appellants did not properly support 11 or substantiate. 12 The last issue in this appeal is whether 13 appellants have established reasonable cause for 14 filing a late return for the 2007 tax year. 15 Appellants filed their joint income tax 16 return for 2007 on October 15th, 2009, nearly 17 one-and-a-half years after its due date. 18 Respondent imposed a late filing penalty 19 because appellants filed a joint return after the 20 due date for 2007, and appellants did not provide 21 reasonable cause for filing a delinquent joint 22 return. 23 This is supported by the Board of 24 Equalization appeal staff summary, which provides 25 that appellants never asserted grounds for abating 26 the late filing penalty for 2007. Therefore, 27 respondent cannot abate the late filing penalty. 28 In closing, I ask your Board to sustain 17 1 Franchise Tax Board's position. 2 Thank you. 3 MS. MA: Okay. Five minutes on rebuttal. 4 MR. McDONALD: Um, the only thing I'd like 5 to ask the Board is, you know, based on what both 6 myself and Mr. Ghaderi mentioned in the -- our 7 opening statement -- statements is to look at the 8 entire transaction with regards to the loan. The 9 January 2006 date through when the property closed 10 in 2007. 11 As to why it was necessary to move the 12 moneys out of the Ashdon Valencia Corporation to the 13 shareholders, but then shareholders immediate -- not 14 immediately, but subsequently loan that money right 15 back to Sand Canyon. Which was the original intent 16 for -- to go from Valencia to Sand Canyon. 17 So I think by looking at the entire time 18 period and purpose of why it was done, um, I think 19 the intent of it, you know, was for it to -- to be a 20 loan and not a constructive dividend. 21 MR. GHADERI: The only comment I -- maybe 22 I'll -- Jerry has already commented on that. And I 23 read in my comments to the record. 24 As far as the auto expenses, we have 25 documentation for every auto expense that we have, 26 and related to A&S Engineering. These took a long 27 time to research and find. 28 My apologies to FTB. 18 1 But I would request that they be reviewed, 2 and they'll find out that there's more auto expenses 3 than we had re -- re -- reported. So I'd appreciate 4 their review of those documents 5 Thank you. 6 MS. MA: Okay. 7 Question? 8 Ms. Harkey. 9 MS. HARKEY: For the appellant, hi. 10 MR. GHADERI: Yes, ma'am. 11 MS. HARKEY: On -- the FTB on the auto 12 expenses, I'm willing to consider these. But the 13 FTB pointed out some glaring inconsistencies that 14 you, you know, may -- or wish to withdrawal. 15 Check 4221 on 3/9/2006, and 3/9/2006, 4222, 16 4223 and 4470. Those are Longo Toyota and then 17 GMAC. Those are dated '05. And it looks like -- I 18 would suspect that you took the expense or the 19 write-off in '05 and probably not in '06. 20 So I'd suggest you, um -- if you can offer 21 an explanation of that sometime before this hearing 22 is over, that would be good. The rest of them seem 23 to be valid and perhaps, um, considerable. But why 24 did these take so long to surface? 25 MR. GHADERI: First of all, to answer your 26 question, if you don't mind. 27 MS. HARKEY: Sure. 28 MR. GHADERI: On those items on the 2005, 19 1 again, I just had my staff -- the checks -- my 2 original office manager who handled -- was with us 3 in 2006, when she left, we couldn't simply find it. 4 Just -- that's what it is. We couldn't find it. 5 And then, um, as we got closer to this 6 hearing, we searched all over the place, and finally 7 we were lucky to find these checks. And, in fact, I 8 have requests made to Bank of America to find these 9 checks for us. 10 Because the documents that we give to 11 Jerry when he files these taxes are based on these 12 checks. 13 Bottom line, we found the checks. And, 14 again, my apologies to FTB if we didn't do our 15 research ahead of time. 16 But as far as the 2005 checks, again, I'll 17 be -- again, I had -- when they found the checks, 18 anything that was cashed in 2006, that's what they 19 put in here for me. 20 MS. HARKEY: Okay. So it is -- 21 MR. GHADERI: So if you were -- 22 MS. HARKEY: It is conceivable that these 23 2005 checks might have been omit -- or should have 24 been omitted? 25 MR. GHADERI: I got to double check. You 26 might -- you might -- 27 MR. McDONALD: Can I -- 28 MR. GHADERI: I'm trying. Go ahead. 20 1 MR. McDONALD: -- say something? 2 MS. HARKEY: Sure. Thank you. 3 MR. McDONALD: Thank you. 4 What his staff, how they would provide 5 information back in those early 2000 years is they 6 would prepare a schedule. Not on the date on the 7 check, unfortunately, but when they received the 8 checks back from the bank. 9 So the fact that, you know -- and I haven't 10 had a chance to go back and cross-reference 2005, 11 because I just got a copy of this yesterday also. 12 So it is possible that though they have a 13 December -- late December '05 date on them, that 14 they were not deducted in '05. Because when she 15 prepared the hand schedule to provide to me to 16 prepare the return, that it had a clearance date of 17 '06 and it was included on the '06 and not the '05. 18 So that is an explanation, but I can't tell 19 you one way or the other if that existed. 20 MS. HARKEY: Okay. Thank you. 21 Yeah, I happen to have some experience 22 trying to find old, old, old records. And it's 23 very, very difficult -- 24 MR. GHADERI: Yes. 25 MS. HARKEY: -- very time consuming. 26 Especially with a bank like Bank of America that's 27 got so many -- it's just very difficult. It's hard 28 to get anyone to even accept the order, let alone to 21 1 comply with it. 2 MR. GHADERI: Absolutely. 3 MS. HARKEY: But just -- it's very tough. 4 So I do have some sympathy for this. And I would 5 personally like this looked at and considered. 6 Next, though, I've got a problem with the 7 loan or the dividend, as the case may be. It 8 indicated that you received the moneys, and then 9 seven -- seven months went by or more before you 10 actually loaned them. 11 How did that work out? 12 MR. GHADERI: Well, we were going through 13 escrow process. As I mentioned, when we -- in order 14 for us to purchase the property, the seller wanted 15 to have confirmation of the funds and also the loan 16 approval before he would enter into escrow with us. 17 We had to obtain the approval for the loan, 18 the loan had to be funded, and then we entered 19 escrow. And then the funds had to be sent over to 20 Ashdon Sand Canyon. 21 MS. HARKEY: At the time of closing? 22 MR. GHADERI: Yes. 23 MS. HARKEY: And it took you roughly seven 24 months to close? 25 MR. GHADERI: Because of due diligence as 26 far as, you know, it's a 20 acre property. And 27 three different, you know, entities on it, 28 businesses on it; mobile home park, a gas station, 22 1 and a small closed office building. 2 So we have -- you know, it's quite a bit of 3 an endeavor to go through it. And we have to get 4 approvals from, you know, the operators and what 5 have you. So it literally took about six, seven 6 months. 7 MS. HARKEY: And sales reports -- 8 MR. GHADERI: Yes, ma'am. 9 And, again, this is next to the water shed 10 area that we had to get Army Corps of Engineers 11 involved. You know, not -- not necessarily get 12 approval from them, but due all -- due diligence. 13 And it takes time to get their approval. 14 MS. HARKEY: Okay. So they require that 15 you have funds on deposit prior to even opening an 16 escrow. 17 MR. GHADERI: Yes, ma'am. It's a -- it's 18 a -- it was a big transaction. It was approximately 19 $7 million. And they didn't want to waste any -- 20 waste their time, you know, going into escrow with 21 somebody that might not have the funds. 22 MS. HARKEY: Okay. Did the -- did the 23 other entity -- let me see which entity. 24 Did -- money got loaned to Ashdon, is what 25 you're saying. Money got loaned to Ashdon to buy 26 Sand Canyon? 27 MR. GHADERI: Yes, ma'am. 28 MS. HARKEY: Okay. Did Sand Canyon ever 23 1 make any interest payments or anything to Ashdon? 2 MR. GHADERI: No. They're not in position 3 to do so. 4 MS. HARKEY: Was the note document such 5 that there was an interest to be charged? 6 MR. GHADERI: I don't have the document in 7 front of me. My apologizes. 8 MS. HARKEY: The FTB is saying there -- it 9 was not. 10 MR. GHADERI: Okay. 11 MS. HARKEY: And there were no payments 12 made; there were no dividends -- or, to date, no 13 payments or repayments from either you or Ashdon 14 or -- or -- or Sand Canyon. Excuse me. 15 I've got a little -- I've got a little bit 16 of a problem with the loan, only because of the 17 legal requirements for tax purposes. 18 But, um, I really do believe that these 19 ought to be considered, and I'm sure the FTB will 20 take that into consideration. 21 Thank you. 22 MS. MA: Okay. 23 Ms. Stowers. 24 MS. STOWERS: I just have a quick followup 25 question on -- regarding automobile expense. 26 Ms. Harkey pointed out four checks that are 27 dated 2005, and I also see one check, 4014, dated 28 2005. The very first check. 24 1 MR. GHADERI: Yes, ma'am. 2 MS. STOWERS: My question is actually in 3 respect to the law. So I will go to the Franchise 4 Tax Board first. 5 If the checks are written in one year, but 6 do not clear the bank until the subsequent year, 7 under the law, which year do you claim on the 8 deduction? 9 MR. IMMORDINO: Generally, under the rules 10 of constructive receipt, those checks would be 11 credited to 2005. 12 MS. STOWERS: Okay. So that would mean, 13 under the law, 4014, 4221, 4222, 4223, and 4470 14 would not be automobile expenses for the 2006 year? 15 MS. MA: There's one more, too. 16 MS. STOWERS: And there's one more. 17 MS. MA: 4090. 18 MS. STOWERS: 4093. 19 So to the Franchise Tax Board, during the 20 course of your audit, um, for the automobile 21 expenses, you were trying to verify the expenses 22 actually took place. Did you come to a conclusion 23 that they were ordinary, necessary business 24 expenses? 25 MS. COAKLEY: So originally the expenses 26 were listed as other expenses on -- on the tax 27 return. So when we got information from appellants 28 that they were consulting expenses, mileage 25 1 reimbursement, lease payments, then we asked more 2 questions re -- regarding the consulting expenses. 3 That was the majority of what they were claiming. 4 And they were able to substantiate all of that. 5 With regard to the automobile expenses, 6 they were never able to explain why A&S Engineering 7 had automobile expense -- expenses for that 8 particular entity. They also were not able to 9 substantiate any of -- of the expenses that they 10 were claiming. They gave us a handwritten schedule 11 originally. 12 They claimed that they would be able to 13 substantiate the lease payments. That they had 14 checks from the bank. And they just never provided 15 them to Franchise Tax Board. 16 As far as mileage reimbursement, they did 17 provide a schedule. And then on appeal, they did 18 provide three checks. But three checks were not on 19 their own schedule. And just looking at the checks, 20 it was very difficult to determine whether this was 21 even for an automobile expense. 22 MS. STOWERS: To the appellant, um, can you 23 speak to the ordinary, necessary business expense 24 for the automobile? Are you -- 25 MR. McDONALD: Explain how -- 26 MR. GHADERI: Sure. 27 As far as the mileage reimbursement, as you 28 can see on the table that we provided you, there's 26 1 different names of my employees. As part of our 2 business for A&S Engineering, we travel to a lot of 3 agencies to obtain approvals for our projects. And 4 these reimbursements are for their mileage 5 reimbursement as they drive through the city, you 6 know, mileage payments. And so these are all 7 substantiated with the checks that we wrote to them 8 every month for the expense that they turned in. 9 MS. STOWERS: Okay. 10 MR. GHADERI: And then as far as the 11 vehicles, they're vehicles for myself, for -- for my 12 wife, and one of our other members of the office. 13 That's what those car payments -- they're lease 14 payments that we made to the corporations for cars 15 that we drive, as well as the car payments that you 16 see on this list. 17 MS. STOWERS: Okay. 18 I think Ms. Harkey covered the -- the 19 loans -- loans or dividends to shareholders, and 20 concluded that nothing has been paid yet and no 21 interest. 22 With respect to the -- the -- the late tax 23 return. Is it your argument that the tax return was 24 filed timely or -- 25 MR. GHADERI: Yes, ma'am. 26 MS. STOWERS: Or -- 27 MR. GHADERI: Correct. Yes, ma'am. 28 MS. STOWERS: You -- you -- 27 1 MR. McDONALD: In one of the documents that 2 I provided in -- in the -- in the paperwork, I had 3 asked Franchise Tax Board for a history of filing. 4 MS. STOWERS: Mm-hm. 5 MR. McDONALD: And if you look at all the 6 years prior, um, a good majority of 'em were 7 April 15th, with the others being October 15th. So 8 the history of the taxpayer up until that point was 9 timely filed. 10 MS. STOWERS: I understand that. 11 MR. McDONALD: Why it wasn't recorded, I -- 12 you know, I can't speak to that. 13 MS. STOWERS: Okay. Thank you. 14 MR. McDONALD: But -- but that's our 15 position. 16 MS. STOWERS: But that's your position. 17 You have a history of timely filing. 18 MR. McDONALD: That's correct. 19 MS. STOWERS: To the Franchise Tax Board, 20 they do have a history of timely filing. Do you 21 have the -- a copy of the tax return in your 22 exhibits? When was the tax return signed? 23 MS. COAKLEY: Can I comment on whether they 24 filed timely returns? 25 MS. STOWERS: Yes, please. 26 MS. COAKLEY: Thank you. 27 So for 2006, they filed an untimely return. 28 It was in November of 2007. The 2007 return was not 28 1 filed timely as well. 2 On the federal side -- we were able to get 3 a federal transcript -- the 2006 return was filed 4 late on the federal side. And for the 2007 tax year 5 the return was not filed. 6 MS. STOWERS: At all? Okay. 7 MR. McDONALD: But what I was speaking to 8 was if -- if you look at the '96, '97, '99, 2000, 9 2001, 2005, 2008, 2009, 2011, 2012, they're all 10 timely filed, supported by this document. 11 MS. STOWERS: I understand. So -- 12 MR. McDONALD: So as to what happened in 13 '07, I don't know. 14 MS. STOWERS: Because -- 15 MR. McDONALD: I mean, as -- as -- 16 MS. STOWERS: I understand. So they have a 17 history of filing timely, but for the '06 and '07 18 return for California, they did not file a tax 19 return on time, and they were late for the federal 20 return and did not file a federal return. And as 21 we -- 22 MR. GHADERI: Madam -- 23 MS. STOWERS: -- know, each year -- 24 MR. GHADERI: -- I -- 25 MS. STOWERS: -- stands on its own. 26 Thank you, sir. 27 MR. GHADERI: Yeah. Okay. 28 MS. MA: Mr. Runner. 29 1 MR. RUNNER: The -- the distribution, um, 2 in terms of the loan, um, and the timeliness of it 3 there or the amount of time, you were saying that 4 they -- you need -- the -- the money needed to be 5 deposited? 6 MR. GHADERI: Yes, sir. 7 MR. RUNNER: In order to -- as earnest 8 money, I suppose, for some transaction that was 9 about to take place? 10 MR. GHADERI: Yes, sir. 11 MR. RUNNER: Deposited where? 12 MR. GHADERI: Uh, in a -- in an account. 13 But in this case, it had to be in our account. 14 Because of the fact that we got the loan. 15 MR. RUNNER: You had to -- you had to 16 demonstrate in your own accounts that you had the 17 money? 18 MR. GHADERI: Yes, sir. 19 MR. RUNNER: They didn't require you to put 20 the money anywhere else? 21 MR. GHADERI: No. They required -- at that 22 time, required that it had to be in our personal 23 account and then loaned back into Sand Canyon. 24 MR. RUNNER: And do you have any 25 documentation of that correspondence in regards to 26 how that was done or how you demonstrated that, or 27 that requirement they had asked you to do that? 28 Any -- anything that you've got to help us see that 30 1 that was indeed a requirement of your transaction? 2 MR. GHADERI: Unfortunately, I don't have 3 documentation. The person who did our -- the loan 4 broker who did our loan through the Centennial Bank, 5 unfortunately, has passed away. And, unfortunately, 6 I don't have any documents. Most of it was verbal. 7 And if there is documentation, he's the one who had 8 it. So my apologies. 9 MR. RUNNER: Okay. Let me just ask, in 10 regards to the auto transactions, is -- let me 11 ask -- well, let me ask FTB. 12 In your review of those -- are you going to 13 be able to review those in a -- in a satisfactory 14 setting for yourself in regards -- well, I guess -- 15 well, how are you going to be able to review that 16 right now as opposed to, for instance, us granting a 17 30/30/30 on the tax -- on the -- on the -- on the 18 auto expense issues? Since you just received this, 19 too. 20 MS. COAKLEY: Yes. I -- I think I would 21 need time to be able to go through it in detail. 22 And -- 23 MR. HORTON: So moved. 24 MR. RUNNER: I assume that -- how narrow 25 you want to make that? 26 MS. STOWERS: Limit to the auto -- 27 MR. HORTON: Just the auto expense. 28 MR. RUNNER: Okay. So -- So I guess 31 1 there's a -- well, I'll let the Chair take that. 2 MS. MA: Yeah. So -- 3 MS. HARKEY: Are you ready to make a 4 motion? 5 MS. MA: Well, I mean, are we -- are we 6 done with the questions before we -- okay. 7 Well, I -- I just want to go on record also 8 that I'm sympathetic to the auto expenses. And I 9 understand that it's not easy to get checks from the 10 big banks, especially. So I'm sympathetic. 11 But, you know, disallowing the checks dated 12 in 2005 -- I'm also, unfortunately, you know, being 13 a CPA, if we're gonna be doing a loan, normally you 14 either have minutes of the meeting, you put it in 15 there. You have the loan documents. You know, 16 there's a ten factor. You know, checklist that 17 Courts usually consider, um, you know, to -- to be a 18 loan versus a distribution, and all the things that 19 I think, um, some of, you know, Ms. Harkey 20 mentioned, you know, is there, you know, maturity 21 dates, is -- is there, you know, a -- you know -- 22 MS. HARKEY: Interest. 23 MS. MA: -- interest to be paid, you know. 24 Were you booking the interest, even if, um -- even 25 if it wasn't, um -- you know -- done? But, um, just 26 keeping track of it in some sort of record book and 27 actually booking on your tax returns I think would 28 have been a lot more persuasive to me. So, um -- so 32 1 that's where I am. 2 Oh, Mr. Horton. 3 MR. HORTON: Thank you, Madam Chair. 4 I might suggest that the Department take a 5 moment or two and share with the taxpayer the 6 conditions upon which the automobile expense would 7 be deductible, just in case they need to acquire 8 additional information or additional documentations 9 to support their transactions. 10 The check, in and of themselves, as I 11 reviewed them, did not seem to have enough 12 information. But possibly further clarification of 13 what those transactions entail might be helpful to 14 the Department in determining whether or not they 15 are allowable. 16 I would also suggest to the Department that 17 discussions about alternatives, hypothetical 18 alternatives that the taxpayer could have engaged 19 in, such as making the payment directly to the 20 company, as opposed to taking it out to themselves. 21 And then executing the transaction and the 22 timeliness thereof. 23 MR. IMMORDINO: We would be very happy to 24 do that. 25 MS. MA: Ms. Harkey. 26 MS. HARKEY: I -- I -- I think their 27 argument about borrowing the funds is a good one. 28 Unfortunately, it doesn't stand up for tax purposes. 33 1 But I do believe that the bank probably required 2 them to borrow and guarantee personally. And he 3 probably -- 4 I'm assuming you had money sitting in an 5 account that you could have verified. 6 But that even that being said, the fact 7 that there was no interest and no specifics on the 8 notes and other things would create a problem for 9 tax purposes. 10 So next time. 11 MR. GHADERI: Yes, thank you. 12 MS. MA: Okay. So there is a motion. I 13 heard a motion. 14 MS. HARKEY: I'd like a motion -- 15 MR. RUNNER: Let's go ahead and go through 16 the whole thing. 17 MS. MA: Yeah, let's -- let's go for the -- 18 MS. HARKEY: Okay. A motion to support the 19 Department with the exception of the auto expenses 20 checks that were supplied today to be examined on 21 the 30/30/30. And that means get back to the Board. 22 Thirty days for the taxpayer to supply any 23 information, thirty days for the FTB to review, and 24 then 30 days to get back to the Board. 25 MS. MA: Is there a second, or -- 26 MR. EPOLITE: Might I make a recommendation 27 to the Members? 28 MS. MA: Sure. 34 1 MS. HARKEY: You may. 2 MR. EPOLITE: That we bring this back as a 3 proposed summary decision in this instance. That we 4 do additional briefing, having the Franchise Tax 5 Board go first with additional briefing, analyzing 6 the taxpayer submission, and then it goes to 7 appellants to respond. And then Appeals writes up a 8 proposed decision for the Board's adoption -- well, 9 we'll hear everything that the Board has to offer, 10 obviously, when you're done with your discussions. 11 We'll hear your -- everything you have to offer. 12 But I'm sensing that you have a conclusion 13 you're about to reach, but that we have just this 14 one thing that you want -- you want still -- 15 MS. HARKEY: The -- the order -- the order 16 is important. And I think you're right. 17 MS. EPOLITE: Right. 18 MS. HARKEY: The order should be that the 19 FTB review what's provided. 20 MR. EPOLITE: Right. Sounds like you just 21 have this one part that still needs to be resolved. 22 MS. HARKEY: Right. And so it's only -- 23 it's only the auto expenses -- 24 MR. EPOLITE: Auto expenses that needs to 25 be resolved. 26 MS. HARKEY: -- that we need to be 27 resolved. 28 MR. EPOLITE: Right. 35 1 MS. HARKEY: The rest of it we have agreed, 2 or I've made a motion to -- 3 MR. EPOLITE: Right. 4 MS. HARKEY: -- support the Franchise Tax 5 Board. 6 MR. EPOLITE: Right. It looks like that 7 you just had this one discreet issue that needs to 8 be resolved. So that in this instance it does need 9 to come back for the -- to the Board. 10 MR. RUNNER: It does? 11 MR. EPOLITE: Does not. 12 MR. RUNNER: Does not. 13 MR. EPOLITE: That in this instance looks 14 like we can write a decision after this additional 15 briefing process. So we'll come back on 16 adjudicatory calendar after we draft a decision 17 after the additional briefing process. 18 MS. MA: So it will be quicker for the 19 taxpayer instead of, you know, 30 days, and coming 20 back in -- in 90 days. 21 MR. EPOLITE: Right. 22 MS. MA: That they can -- 23 MR. EPOLITE: So -- 24 MS. MA: Once they review and make a 25 decision -- 26 MR. EPOLITE: Right. 27 MS. MA: -- then we can just do the 28 write-up. 36 1 MR. EPOLITE: So -- 2 MS. HARKEY: My question, though, is does 3 the taxpayer -- if the taxpayer doesn't agree with 4 the final appeal, do they have the right to bring 5 this back to us? 6 MR. EPOLITE: Sure. Because there's always 7 the option of a -- 8 MS. HARKEY: Okay. 9 MR. EPOLITE: -- petition for rehearing at 10 the end of the day. 11 But -- but they'll still have, you know, 12 the additional briefing process to provide their 13 input. 14 MS. HARKEY: Right. I just want -- I 15 just -- I just always like to be sure that they are 16 heard, and they know that if they don't feel they're 17 heard, they can come back to the Board. 18 MR. EPOLITE: Absolutely. Through the 19 additional briefing process, they'll still -- 20 they'll still have their input. 21 But at this point, I'll stop talking. 22 MS. HARKEY: Okay. 23 MR. EPOLITE: I'll -- I'll let you 24 continue. 25 MR. RUNNER: Let me just ask you -- I have 26 a question in regards to that. 27 Let me ask you a question in regards to 28 that. So would it be basically saying it's -- it's 37 1 -- I mean, it's not a 30/30/30. 2 MR. EPOLITE: It will be a 30/30/30. 3 MR. RUNNER: It is a 30/30/30, but not a 4 continued hearing? 5 MR. EPOLITE: Correct. Because it sounds 6 like you just need to have this one analysis done. 7 MR. RUNNER: Because we do not have the 8 ability to -- to bifurcate this one particular 9 item -- 10 MR. EPOLITE: Correct. 11 MR. RUNNER: -- to be coming back to the 12 Board on its own. 13 MR. EPOLITE: Right. 14 MR. RUNNER: We would be having to have the 15 whole issue come before us. 16 MR. EPOLITE: Yeah. 17 MR. RUNNER: So in order to move forward, 18 and we're better off to go ahead and do it, do it as 19 a 30/30/30 with some discussion just -- with our 20 instructions just to focus on the auto issue. 21 MR. GHADERI: That's correct. 22 MR. RUNNER: And then, um -- then that 23 would be coming back to us on H calendar or 24 something. 25 MR. EPOLITE: Correct. 26 MR. RUNNER: And then if indeed -- 27 MR. EPOLITE: We'll write it up with all 28 the direction you're giving us on all issues. 38 1 MR. RUNNER: And if indeed then the 2 taxpayer does not agree with the portion of it that 3 we are asking you -- ask the FTB and the taxpayer to 4 deal with, their path back to us then is a -- is 5 a -- is for a rehearing. 6 MR. EPOLITE: Correct. 7 MR. RUNNER: Okay. I got it. 8 MR. EPOLITE: Because they're -- they're 9 still sitting here now. 10 MR. RUNNER: So does the motion -- tell me 11 about the motion then, how -- 12 MS. MA: Okay. So -- 13 MS. HARKEY: Can you finish the motion? 14 MS. MA: Okay. So Ms. Stowers has been 15 typing. 16 MS. STOWERS: I have a motion for a 17 30/30/30 for additional briefing on the automobile 18 expense item. And for it to come back to the Board 19 on summary decision H calendar. 20 MR. EPOLITE: Correct. 21 MR. HORTON: Second. 22 MS. MA: Okay. 23 MS. HARKEY: Thank you. 24 MS. MA: No objection -- 25 MR. EPOLITE: I would still recommend that 26 you detail to the taxpayer, you know, what your 27 resolution of the late filing penalty issue is -- 28 MS. MA: Oh, right now -- 39 1 MR. EPOLITE: -- and as far as -- 2 MS. MA: Okay. So -- 3 MR. EPOLITE: -- on the dividend loan issue 4 as well, how you're resolving those issues. 5 MS. MA: Okay. So -- well, in the motion I 6 think we are sustaining the FTB on the loan issue as 7 well as the late filing? 8 MR. EPOLITE: Yes, correct. 9 MS. MA: However, the auto is what we would 10 like the Franchise Tax Board to go back and -- and 11 review the taxpayers records. And that will be in 12 the, um -- 13 MR. EPOLITE: 30/30/30. 14 MS. MA: -- 30/30/30 proposed decision 15 written up by the Appeals to be reviewed and 16 approved by the taxpayer. If not, the taxpayers can 17 come back for a rehearing -- 18 MR. EPOLITE: Right. 19 MS. MA: -- on that issue. 20 MR. EPOLITE: Correct. 21 MS. MA: Okay. 22 MR. RUNNER: That is the motion? 23 MS. STOWERS: That is the motion. 24 MS. HARKEY: That's the motion. 25 MR. McDONALD: Crystal clear. 26 MS. HARKEY: Go do your research on your 27 auto expense. 28 MS. MA: All right. Thank you very much. 40 1 There was a motion -- yeah. 2 MS. HARKEY: Yeah, we said second. 3 MS. MA: Motion and a second. Well, I said 4 without objection, so -- 5 MS. HARKEY: Unless you object. 6 MR. RUNNER: No, no. I just didn't hear 7 the question. 8 MR. McDONALD: Thank you. 9 ---o0o--- 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 23 . 24 . 25 . 26 . 27 . 28 . 41 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, Jillian Sumner, Hearing Reporter for 8 the California State Board of Equalization certify 9 that on November 29, 2016 I recorded verbatim, in 10 shorthand, to the best of my ability, the 11 proceedings in the above-entitled hearing; that I 12 transcribed the shorthand writing into typewriting; 13 and that the preceding pages 1 through 41 14 constitute a complete and accurate transcription of 15 the shorthand writing. 16 17 Dated: March 6, 2017 18 19 20 ____________________________ 21 JILLIAN SUMNER, CSR #13619 22 Hearing Reporter 23 24 25 26 27 28 42